A Second Case of Fraud at Thor Industries: An SEC Cease and Desist Order Directed at Thor Industries after the 1999 Discovery of Fraud at One of Its Subsidiaries Appears to Have Fallen on Deaf Ears. to Avoid Repeat Violations and Ensure That Corporations Implement Appropriate Internal Controls in Similar Cases, Stricter Punishments May Be Needed

Article excerpt

Thor Industries, Inc. claims to be the world's largest manufacturer of recreational vehicles and a major builder of buses and ambulances. Its fiscal July 2010 sales were $2.2 billion, and its net income was $110 million. In fiscal 1998, it had sales of $715.6 million and net income of $19.4 million. In October 1999, the U.S. Securities & Exchange Commission (SEC) ordered Thor to cease and desist further violations of securities laws following the coverup of embezzled funds in a subsidiary, which required restatement of results in years ended July 1996 through 1998. In May 2011, Thor became the subject of another SEC order to cease and desist -- this time for having poor internal controls that required restating years ended 2004 through 2006.

According to SEC release No. 34-42021, the 1999 case involved Thor subsidiary ElDorado National, Inc. Absence of internal controls enabled Bradley John Buchanan, general manager and controller of ElDorado, to embezzle more than $400,000 in cash over a four-year period. He also overstated ElDorado's reported income in order to obtain bonuses of $55,297. Without sufficient oversight, Buchanan was able to write checks to himself ($105,000), initiate wire transfers to himself or to his private corporation ($262,000), and direct the issuance of money orders to himself or his corporation ($48,000).

The cooking of ElDorado's books went undetected by Thor's corporate management in Jackson Center, Ohio, and its external auditors, Deloitte & Touche (D&T). Apparently, neither visited the ElDorado's offices where accounting records were kept during the relevant period. D&T used a "rotational" system to select subsidiaries designed to audit those covering at least 70% of consolidated assets, and, as of January 1998, ElDorado amounted to only 5.1% and 2.8% of consolidated sales and net income, respectively, and had only five salaried employees.

The only penalty assessed on Thor by the SEC in 1999 was to "cease and desist from committing or causing any violation, and any future violations" of the relevant sections of the Exchange Act of 1934. The Wall Street Journal reported on May 8, 1998, that Thor hired the forensic-auditing group at Deloitte & Touche to help in "the investigation of this loss and any possible recovery." (You wonder why the audit committee didn't choose a different firm.) Buchanan was also charged criminally.

The 2011 case involved a very similar scenario in which poor internal control in a subsidiary again enabled a senior executive to commit fraud. Without admitting or denying the SEC's charges, Thor agreed to permanently comply with the 1999 cease and desist order that prohibited violations of the books and records and internal controls provisions of the securities laws. The second offense also triggered a $1 million civil penalty, and Thor agreed to hire an independent consultant to review and evaluate internal controls and recordkeeping policies and procedures.

In Litigation Release No. 21966, the SEC charged Mark C. Schwartzhoff, former vice president of Finance at Thor's Dutchmen Manufacturing, Inc. subsidiary, with securities fraud and other violations. Dutchmen amounted to approximately 10% to 18% of Thor's revenues and 6% to 13% of its pre-tax income during Thor's fiscal years 2002 to 2006 (ended July 31).

The 2011 SEC complaint provides details of how Schwartzhoff was able to make regular unsupported manual journal entries to Dutchmen's cash, receivables, and payables accounts to correct discrepancies that occurred during monthly account reconciliations. Schwartzhoff also wrote company checks for delinquent federal taxes and stamped them with the signature stamp of Dutchmen's president without his knowledge. He then concealed these payments by making unsupported manual journal entries to a balance sheet account instead of to payroll tax expense.

According to the complaint, the largest area of fraud Schwartzhoff was able to engineer was in cost of sales. …